Private Sector Infrastructure Facility at State Level Project EXECUTIVE SUMMARY Provided to the State Governments of Andhra Pradesh Gujarat Karnataka Madhya Pradesh and Asian Development Bank By CPCS Transcom Limited In association with Oxford Policy Management Nathan Incorporated The Economic Research Institute Luthra and Luthra Private Sector Infrastructure Facility at State Level Project EXECUTIVE SUMMARY Provided to the State Governments of Andhra Pradesh Gujarat Karnataka Madhya Pradesh and Asian Development Bank By CPCS Transcom Limited In association with Oxford Policy Management Nathan Incorporated The Economic Research Institute Luthra and Luthra CPCS Transcom CPCS Transcom CPCS Transcom CPCS Transcom Infrastructure Commercialisation Consultants 15 February 2005 Mr. Cheolsu Kim Head, Financial and Private Sector Asian Development Bank Indian Resident Mission 4, San Martin Marg, Chanakyapuri New Delhi 110 021 Dear Mr. Kim, Reference: TA 3791-IND: Enhancing Private Sector Participation (PSP) in Infrastructure Development at State Level It is with pleasure that I am forwarding to you the final report for the above technical assistance project. I believe that the five volumes attached can form the basis for improved private sector participation in the infrastructure sector in India. In addition to the main volumes, we have also prepared an Executive Summary which summarises the main report recommendations. We have also structured the recommendations into seven key steps which are needed to enhance state level PSP activity. These seven steps comprise an action plan which can be applied by any State in India. As you pointed out in the tripartite meetings, while the knowledge of how to support PSP activity seems to be fairly widely accepted, following through on that knowledge and implementing the projects is not being done. In the report we have provided a body of material which we hope can assist in that implementation. While this report is bulky, it was written with the idea of eventually turning it into a reference book for wider dissemination to other state organisations around India. That option still remains. We believe that the concepts and the issues highlighted here, have broader application in other states as well. In closing I would also like to thank you and your colleagues for your support and help on the project. Yours sincerely, CPCS Transcom Limited W. Greg Wood Chairman 72 Chamberlain Ottawa, Ontario, Canada K1S 1V9 Tel: (613) 237-2500 Fax: (613) 237-4494 email: [email protected] website: www.cpcstrans.com EXECUTIVE SUMMARY Executive Summary E.1 Introduction The Government of India has for some time believed that more could be done to leverage the infrastructure investments made by the public sector into an expanded role for the private sector. Clearly India is in critical need of improved infrastructure in virtually all fields. Additional private investment, either singly or in partnership with the Government would accelerate the pace of development and potentially inject a degree of improved accountability and management expertise into a critical area of development. In this project we were asked to assist the States of Andhra Pradesh, Gujarat, Karnataka and Madhya Pradesh, in addressing the constraints to increased private sector participation (PSP) in infrastructure development. The fundamental question was, “What is inhibiting the private sector from making investments in infrastructure and what can be done to overcome those inhibitions?”. Our approach was to work with the organizations in each of the above States to first of all, understand what is being done in each state to support the private sector process ( PSP) - what legislation is in place, what policies are prepared, what organizations are available to assist and what process was being followed to help the private sector identify, assess viability and ultimately decide to invest in a project. After much discussion and review, one outstanding fact stood out, namely, that across the States, there was generally a significant lack of bankable projects. Since the private sector is normally very aggressive in finding ways to make money, acknowledging that there were not many “bankable” projects around was surprising. The remainder of the project was therefore focused on the supplementary question of, “Why is there a shortage of bankable projects?”. The project was divided into a number of streams as follows: The enabling environment – what are the policies, laws, regulations and rules that either inhibit or support PSP in infrastructure investment? The private sector participation process – how are projects identified, evaluated and ultimately developed by the private sector in each state? The institutions - in each state what institutions are either currently involved in making PSP happen or could be involved in making it happen more easily and more often? What role do environmental clearances and social and resettlement approvals play in the process of private sector participation? What factors, such as settlement of disputes or provision of incentives are important to investors and how best should they be handled? Each of these streams is covered in a chapter in the main volume of the report. E.2 Context E.2.1 The Problem It is tempting to search for a magic solution. I wish we could report that there were a series of clearly defined documents that were missing or a set of regulations or approvals that could be improved and that by doing so we could dramatically improve the availability and quality of projects for investment. Unfortunately, that is not the case. In these days of instant communication, conferences, investment tool kits1 and many competent consultants, we were not able to find any kind of instant fix. However, that in itself is a heartening finding. If we had been able to report that some clever way could be found to dramatically improve the climate for PSP investment, I would hope that the readers of this report would be suitably skeptical. 1 A very extensive package of private sector investment support material is available from the IFC/World Bank covering many of the same infrastructure sectors as are covered in this project. The webpage address for this information is < http://rru.worldbank.org/Toolkits/>. CPCS TRANSCOM CONSORTIUM EXECUTIVE SUMMARY What we did find was a series of gaps, not all of which are common to all States, that largely fall into the area of PSP process implementation. These gaps describe things that are not being done now, or are being done inadequately and as a result, the pipeline of projects being made available to the private sector is not being kept full. It was instructive, in one of the last tripartite meetings held with the States, when, after presenting the findings of the project to a selection of senior officials from a number of departments of the State Government, one of the officials stated that, “ Yes, that’s fine but we know all that!”. The question in reply was, “ Fine, if that’s the case, then why are there not more bankable projects in this State?”. The official answered, “ Because, while we know what to do, we are not doing much of it. We do not follow through where needed, we do not provide proper support to PSP and we do not provide the funding when and where it is needed to allow those projects to develop!”. In a nutshell, that sums up the situation in many of the States. In those States where the process and systems and support are strong, success is being achieved. In those States where there is less commitment to the process, systems and support, then we also see less success. We have listed three macro criteria for creating bankable projects as highlighted in figure 2.1. Figure 2.1: Criteria for Bankability Shortage of Bankable Projects Criteria to Determine Bankability Commercial Viability Sound Governance Political Commitment Commercial Viability − Evaluation of bankability and selection of appropriate PSP Mode at early stage; − Provision of sufficient financial support to ensure bankability. Sound Governance − Clear and sound policies and legislation; − Separation of regulation from policy and operations; − Provision of single window clearance arrangements; − Clarification of environmental and social issues. Political Commitment − Clarity of institutional arrangements and responsiblities; − High level political support; − Provision of adequate funding for project preparation; − Allocation of risks on the basis of those best suited to bear those risks; − Continuity of policies and staffing. CPCS TRANSCOM CONSORTIUM EXECUTIVE SUMMARY None of the States could consistently satisfy all of the criteria to achieve bankability. Some states were better equipped than others on some of the measures. For instance, project gap funding was available to a significant degree in some states and not in others. Institutional arrangements in some states were superior to the arrangements in others. Further, the enabling environment in all states was not an impediment to expended investment. While some improvements were advisable and in a number of instances, were made as part of the output of this project, the bulk of the issues that need to be addressed arise in the other two areas - political commitment and commercial viability. The following figure 2.2 illustrates the precedence flow of issues and deficiencies leading to the lack of bankable projects. Figure 2.2: Precedence Flow of Key Deficiencies that Contribute to A Lack of Bankable Projects Commercial Viability Sound